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The failure of the Adani Enterprises FPO has shown that the pen is still mightier than the sword! In a rare philosophical moment, Emperor Napoleon, who lived by the sword, told one of his Generals, “There are only two forces in the world, the sword and the spirit. In the end, the sword will always be conquered by the spirit.”
The implosive effect on the Adani Group of a report by Hindenburg Research, a young, tiny, pesky research firm (it boasted of just 9 employees last year), founded in New York City, which alleged that the Adani group of companies had committed accounting fraud, manipulation of stock prices, round-tripping of funds, etc., seems to have stopped the Adani Juggernaut. Hindenburg is avowedly an ‘activist short seller’ that specialises in publishing alleged corporate fraud and malfeasance of listed companies whose share prices it suspects are inflated, to alert and protect investors by recommending short sell positions on the company’s stock, at a time of its choosing.
It is, to use a military analogy, an ambush -- a guerilla tactic by a small force attacking a much larger and stronger army, taking it by surprise and defeating it by inflicting heavy casualties.
Short sellers who operate in the overheated bull market by selling short make huge profits when share prices crash as a result of their report, thus raising eyebrows on the quality, objectivity and motives of their research. But they can also lose big money if after their expose, the share prices go up. They are thus taking immense risks, being vulnerable to criminal and civil lawsuits that can put them out of business and result in jail sentences if their research is found mala fide in intent and their charges do not stand up to scrutiny when sued.
But Hindenburg, like other such firms, has made a name for itself by bringing down companies in the US such as Nikola, Clover Health, Kandi, and Lordstown Motors with its research reports, which resulted in not only stock crashes but also probes against their CEOs and promoters by the Securities and Exchange Commission (SEC) and prosecution and guilty verdicts in some cases.
A criminal and civil suit against a short seller by the ‘victim’ of its report is the best way for a corporate to redeem itself and earn back the trust of the market and the public. Adani has threatened to sue Hindenburg and the short seller has retorted that it welcomes an opportunity to prove its charges in the courts. That must be rigorously pursued.
In the present case, since regulators are themselves under attack for being complicit in Adani’s alleged malpractices, it may be in the best interest of the Adanis to seek a Supreme Court-monitored investigation to exonerate them of any wrongdoing and initiate action against Hindenburg, if it is found guilty of unethical conduct. This is vital to restore confidence of the public in not just Adani but also in the equity markets.
But it is also well to remember that research firms that recommend short sales if their findings reveal fraud have a useful role to play in society by acting as whistleblowers. Just as activists in civil society are necessary watchdogs in a democracy, short-sellers have a valid function in equity and capital markets as they protect investors from falling prey to fraud and corporate greed.
The Hindenburg report has, in fact, not only rocked the Adani edifice but also the equity markets and parliament as it has raised larger questions: Can we trust our institutions? How do we ensure stock prices are not manipulated and the integrity of stock markets, the underpinning of a free-market economy, is protected? How do you change the widely-held perception, not unfounded, that the family-run large business houses of India, who are cronies of ruling parties, get preferential treatment from those in power, and policies are tweaked to benefit their businesses to the disadvantage of competition and the impression that their transgressions are beyond the pale of law?
The uproar in parliament, where opposition parties are pointing fingers at Prime Minister Narendra Modi for his proximity to Adani, is nothing new. Earlier, the UPA regime was pilloried for crony capitalism. Only the names of the tycoons now involved are different. Even in Nehru’s time, the entrenched old Bombay Club, which was ill-disposed toward newcomers, controlled the moribund private sector -- you could buy any car as long as it was an Ambassador, any scooter as long as it was Bajaj, any truck if it was Tata, any Jeep if it's Mahindra. Today, new names may have replaced some of the older ones. And tomorrow, when a new political party gains power, there will be other names. The regional parties are no less brazen in hopping into bed with tycoons. The old order changes, yielding place to new cronies.
The focus has to shift to the systemic problems plaguing India -- how do we create autonomous institutions and ringfence them from political interference and intimidation and the influence of big business.
Of course, one may say these are motherhood and apple pie statements. But the Hindenburg report has highlighted the absence of these very fundamentals that facilitated Adani’s unbelievable rise. It is tempting, of course, for both Adani and India’s regulatory institutions and those in power to dismiss the Hindenburg report as an attack on India by draping oneself in the national flag. It will only do greater harm to India’s stature as a great democracy, notwithstanding its many flaws.
The ‘desi’ or native businessman wades into an impossible paradox. He rises to the top using politicians, but with vaulting ambition, he dreams of global ambitions and raises foreign equity, borrows from foreign banks, raises debt by issuing dollar bonds, and soon forgets in his hubris that his fortunes and future are now beyond the influence of his local political patrons as his business is now inextricably entwined with international institutions and courts and foreign laws, and continues in his old ways, seeking political patronage. In such an interconnected world, an explosive report of a firm like Hindenburg in far-off shores can lash India and capsize its ship.
When will India create an ecosystem that spawns world-beating businesses like Microsoft, Google, Apple, Facebook, Tesla, Amazon, or Walmart that need no political patronage? When can we create businesses that rise from our soil, born out of the native Indian genius that can creates new markets around the world that need no protection or favours from political masters but, in fact, can cock-a-snook at them and yet dominate and change the world?
On that day, we can dance, wrapping ourselves with our tri-colour, singing Iqbal’s Sare Jahan se acha, Hindustan hamara!
(The writer is a soldier, farmer and entrepreneur)